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Agricultural Production Exemption

Agricultural Production Exemption

September 17, 2024

[Redacted Text]

Re: Request for Technical Advice Letter – [Redacted Text]

Dear [Redacted Text]:

Thank you for your letter dated July 1, 2024 (“Letter”) seeking a technical advice letter from the Michigan Department of Treasury (“Treasury”) on behalf of [Redacted Text] (“Company”). Your request expressly seeks guidance on the application of the Michigan sales tax to various items which are described in the Facts below. Specifically, you inquire whether the agricultural production exemption from sales tax applies to those items. Implicit in the Letter is that Company is also seeking guidance on whether the whether the agricultural production exemption from use tax applies to those items. Your Letter meets the requirements for issuance of a Technical Advice Letter (“TAL”) pursuant to Revenue Administrative Bulletin (“RAB”) 2016-20, Issuance of Bulletins, Letter Rulings, and Other Guidance for Taxpayers. Please consider this response a Technical Advice Letter that may be relied upon by Company.

Represented Facts.

The Represented Facts are assumed to be true for purposes of this TAL. Company is an out-of-state corporation that has a presence in Michigan. Company’s business is in the agriculture sector as it sells products for, and constructs, [Redacted Text]. The items that Company sells (and which may require affixation) are described in the Letter as being [Redacted Text] and include the following:

  1. [Redacted Text]. These are bolted to [Redacted Text] for stability and can be disassembled, reassembled, and reused in another location for agricultural production purposes. [Redacted Text].
  2. [Redacted Text]. Made of stainless steel, are bolted to [Redacted Text], and can be disassembled, reassembled, and reused in another location for agricultural production purposes.
  3. [Redacted Text]. Made of plastic or metal and used [Redacted Text]. They are [Redacted Text] that can be disassembled, reassembled, and reused in another location for agricultural production purposes.
  4. [Redacted Text]. Used for [Redacted Text] and can be disassembled, reassembled, and reused in another location for agricultural production purposes.
  5. [Redacted Text]. Attached to concrete slabs (foundations) outside the [Redacted Text] and can be disassembled, reassembled, and reused in another location for agricultural production purposes.
  6. [Redacted Text]. These are “structural components” and an intricate part of the [Redacted Text]; without which the buildings would “lose their purpose.” It is Treasury’s understanding that [Redacted Text] are designed to provide a [Redacted Text]. [Redacted Text] provide [Redacted Text]. Treasury understands a [Redacted Text] to be [Redacted Text].
  7. [Redacted Text]. Used as a [Redacted Text].

Unless otherwise referenced and discussed separately in this TAL, the items described in the seven categories listed above are referred to in this TAL, collectively, as the “Property.” Furthermore, it is assumed for purposes of this TAL that Company’s retail sales of the Property will be sourced to Michigan and that the transfer of ownership of the Property for retail sales occurs in Michigan.

Request.

Company expressly seeks guidance as to whether the Property is exempt from Michigan sales tax under the agricultural production exemption. Implicit in Company’s request is whether the Property (with the exception of the [Redacted Text]) is exempt from Michigan use tax under the agricultural production exemption.

Applicable Law.

The General Sales Tax Act (“GSTA”), MCL 205.51 et seq, and the Use Tax Act (“UTA”), MCL 205.91 et seq, are complementary tax statutes that generally levy a 6% tax on the sale or use of tangible personal property (and a limited number of services) in Michigan. The sales tax is levied on all persons engaged in the business of making “sales at retail” for any purpose other than for resale, sublease, or subrent, unless an exemption applies. MCL 205.52(1). The UTA imposes tax on tangible personal property that is used, stored, or consumed in Michigan unless an exemption applies. MCL 205.93(1), 205.97. In summary, the legal responsibility for the sales tax falls on the retail seller while the legal responsibility for the use tax falls solely on the consumer. Andrie, Inc v Dep’t of Treasury, 496 Mich 161, 169 (2014). For use tax purposes, real property contractors are “consumers” of materials used and/or consumed by them when engaged in the business of constructing, altering, repairing, or improving real state of others. MCL 205.92(g)(i). See also RAB 2019-15 (Sales and Use Taxation of the Construction Industry - Excluding Manufacturer/Contractors). As explained in RAB 2023-9 (Sales and Use Tax Agricultural Production Exemption), both the GSTA and the UTA exempt the sale, use, storage, or consumption of certain tangible personal property when used for the following agricultural production purposes:

  • Tilling, planting, draining, caring for, maintaining, or harvesting of things of the soil. The reference to “things of the soil” in these statutes “pertains to the products of farms and horticultural businesses, not to blades of well-tended grass.” See RAB 2023-9 quoting TruGreen Ltd Partnership v Dep’t of Treasury (On Remand), 338 Mich App 248, 258 (2021).
  • Breeding, raising, or caring for livestock, poultry, or horticultural products, including transfers of livestock, poultry, or horticultural products for further growth. MCL 205.54a(1)(e) and MCL 205.94(1)(f). The exemptions under MCL 205.54a(1)(f)-(g) and MCL 205.94(1)(bb)-(cc) must also be used for these agricultural production purposes. The exemption is subject to the limitations under MCL 205.54a(3) and MCL 205.94(3), respectively.

The agricultural production exemption is generally available only for tangible personal property that is sold to a person engaged in a business enterprise that uses and consumes the property for the agricultural production purposes described above. This extends to servicers who use their equipment for any of the exempt agricultural production purposes. RAB 2023-9 explains that the business enterprise does not need to be engaged in the actual business of agricultural production itself to qualify for the exemption, but it must use or consume the tangible personal property in one of the exempt agricultural production purposes.

Notably, the exemption does not generally apply to tangible personal property “affixed to and becoming a structural part of real estate.” MCL 205.54a(3); MCL 205.94(3). RAB 2016-4 describes how Treasury will determine whether property is “affixed” to real estate for sales and use tax purposes. In addition to an enumerated list of exceptions to this general rule (e.g., regarding agricultural land tile, subsurface irrigation pipe, portable grain bins, and grain drying equipment), MCL 205.54a(3); MCL 205.94(3), the agricultural production exemption statutes also exempt the following property and provide an additional carve-out to this general rule for such property:

Tangible personal property purchased and installed “as a component part of a structure such as a barn or shop, including, but not limited to, a water supply system, heating and cooling system, lighting system, milking system, or any other appurtenance” used for agricultural production purposes (including the maintenance or improvement of existing structures), “to the extent that it is not permanently affixed to and does not become a structural part of real estate.” MCL 205.54a(1)(f)(v); MCL 205.94(1)(bb)(v).

Concerning such tangible personal property, it will not be considered permanently affixed to or a structural part of real estate “if it is assembled and installed in a manner that it can be disassembled without affecting the physical structural functionality of the original structure and reassembled and reused” for any of the exempt agricultural production purposes. MCL 205.54a(1)(f)(v); MCL 205.94(1)(bb)(v).

Of particular importance to retailers selling tangible personal property, a seller who obtains a properly completed Certificate of Exemption, See e.g., Form 3372 (Michigan Sales and Use Tax Certificate of Exemption) which is available at: 2024 Sales & Use Tax Forms (michigan.gov), (or the required data elements) within 120 days after the date of sale is generally not liable for sales or use tax on the transaction, even if a purchaser improperly claims an exemption. MCL 205.62(6); MCL 205.104b(6). See also RAB 2024-11. There are certain limited situations in which a seller can be liable for the tax, such as those involving fraud on the part of the seller. MCL 205.62(5); MCL 205.104b(5).

Analysis and Conclusion.

The following discusses the application of both the Michigan sales tax and the Michigan use tax to Company’s sale or use of the Property in Michigan.

Sales Tax.

Absent an exemption claim made by its customers, Company would be liable for sales tax on the retail sale of the Property. As noted above, to the extent Company’s customers make a valid exemption claim (e.g., Company receives a completed Form 3372 from its customers claiming the agricultural production exemption) and none of the mitigating factors are present (e.g., fraud), Company would not be liable for sales tax on its retail sales of any of the Property.

Use Tax.

Company’s potential use tax liability concerning the Property [Redacted Text] could arise under the UTA to the extent Company is considered a real property contractor (i.e., a person engaged in the business of constructing, altering, repairing, or improving real state of others located in Michigan) because such contractors are considered “consumers” for use tax purposes as noted above. After applying the facts to the applicable law, Treasury’s determinations for each of the applicable items of Property are presented below. Although a finding that items of Property do not become a structural part of real estate is sufficient for determining their nontaxable status under MCL 205.94(1)(bb)(v), they would also be considered not permanently affixed to real estate under that subdivision for purposes of the exclusion under MCL 205.94(3).

  1. [Redacted Text]. This qualifies for the agricultural production exemption. Based on the facts presented, these items would not be disqualified under MCL 205.94(3) because even though they appear to be affixed to real estate, they are not a structural part of that real estate either generally or as provided in MCL 205.94(1)(bb)(v).
  2. [Redacted Text]. This qualifies for the agricultural production exemption. Based on the facts presented, these items would not be disqualified under MCL 205.94(3) because even though they appear to be affixed to real estate, they are not a structural part of that real estate either generally or as provided in MCL 205.94(1)(bb)(v).
  3. [Redacted Text]. This qualifies for the agricultural production exemption. Based on the facts presented, these items would not be disqualified under MCL 205.94(3) because even though they appear to be affixed to real estate, they are not a structural part of that real estate either generally or as provided in MCL 205.94(1)(bb)(v).
  4. [Redacted Text]. This qualifies for the agricultural production exemption. Based on the facts presented, these items would not be disqualified under MCL 205.94(3) because even though they appear to be affixed to real estate, they are not a structural part of that real estate either generally or as provided in MCL 205.94(1)(bb)(v).
  5. [Redacted Text]. This qualifies for the agricultural production exemption. Based on the facts presented, these items would not be disqualified under MCL 205.94(3) because even though they appear to be affixed to real estate, they are not a structural part of that real estate either generally or as provided in MCL 205.94(1)(bb)(v).
  6. [Redacted Text]. Company states that these items are “structural components of the building” and are an “intricate part of the building” and that without [Redacted Text], “the building loses its purpose.” It is Treasury’s understanding that [Redacted Text] are affixed but are not generally a “structural” part of the building (as they are often replaced without impacting the structural integrity of the building) and they can be disassembled without affecting the physical “structural” functionality of the building. To the extent Treasury’s understanding is correct, [Redacted Text] would qualify for the agricultural production exemption because even though they appear to be affixed to real estate, they are not a structural part of that real estate either generally or as provided in MCL 205.94(1)(bb)(v). Unlike [Redacted Text] cannot be disassembled without affecting the physical “structural” functionality of the building. Treasury agrees with Company that [Redacted Text] are “structural components” of the building and are taxable as they are not eligible for the agricultural production exemption.

Please contact me if you have any further questions regarding this matter.

Sincerely,

/s/ David Matelski

Administrator, Tax Policy Division